Euro on cusp of failure as experts say damage ‘hard to reverse’ | City & Business | Finance

New Year’s Day will mark Croatia’s introduction of the euro, the first country to do so in almost a decade after Lithuania adopted the currency in 2019. Back in 1999, New Year’s Day saw the launch of the euro, heralded as a global-leading currency which would one day rival the US dollar. However, recent analysis now reveals the impending danger facing the euro, with particularly concerning figures emerging in the last year.

Why is the euro struggling?

Analysts have described the 2022 financial year as the “worst in the euro’s history“. 

In the last year alone, it has lost 16 percent of its value against the dollar. According to Statistica, the euro-to-dollar exchange rate fluctuated over the past year, reaching its lowest recorded since the financial crash of 2008. 

Plus, in October, it was trading at its lowest since December 2002. As of December 28, the euro and dollar currency pair (EUR/USD) was trading at $1.0648, an increase to a level that has not been seen since June. 

Just like in the UK with the sterling pound, both inflation and the energy crisis have affected the euro’s value. When Russia stopped the supply of gas to Europe, the pair hit a 20-year low of less than a dollar in September. 

Due to the pandemic, inflation was already high at the beginning of the year, but as a result of Russia’s invasion of Ukraine in February, sanctions on Moscow and borrowing costs have seen prices skyrocket. 

While the situation is precarious with recession a possibility, a chief business economist at S&P Global Market Intelligence, Chris Williamson, said that any downturn would be “milder than thought” a few months ago. 

This month, the European Central Bank eased the rate at which it was hiking interest rates. 

However, analyst Piero Cinagri at Capital.com, writing in October, said the single currency has already depreciated. He said: “It is hard to identify catalysts that could reverse the euro’s course”. 

Where has the euro been a success — or failure? 

Hungarian politician and economist Gyorgy Matolcsy, writing for the Financial Times that year, described the creation of the “common currency” of Europe as an “ill-advised decision” that was “too good to be true”. 

According to a cepStudy, published in 2019, Germany, Netherlands, and Greece benefited from the introduction of the euro. 

Germany has gained by far the most, almost €1.9 trillion – approximately £2.3 trillion – from 1999 to 2017. 

After initially gaining “hugely” when it joined the euro, since 2011, Greece suffered “enormous losses”. 

In all the other countries examined — Spain, Belgium, Portugal, France, and Italy — the introduction of the euro resulted in a drop in prosperity. 

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However, according to the Bank of Lithuania’s calculations published that same year, just half a decade since they introduced the euro, it was found that the “benefits clearly outweigh all the incurred expenses”.

Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, said: “Thanks to the euro adoption, we entered the top financial league – the euro area – which not only ensures higher financial stability and safety in Lithuania but also provides the country with specific economic advantages. 

“According to our calculations, the adoption of the euro was followed by more robust economic growth that helped both households and businesses generate additional income.”

With the war in Ukraine raging on, the future remains uncertain for the euro and whether it will be affected as badly as it was in 2009 following the crash.

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